Small but perfectly formed investments for 2015

As the Alternative Investment Market approaches its 20th birthday, small-cap and generalist venture capital trust managers are still finding good opportunities further down the market cap scale, Cronan MacMahon has said.

The sales and marketing director for Cavendish Asset Management said: “When Aim started it had 10 companies listed; now there are more than 1100.

“While it has had a bumpy ride in 2001 to 2002, it has come into its own. And not every company is ‘small’ or new - some are very mature companies with up to £550m market capitalisation and a long track record, which can be good prospects.”

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Small caps can be more volatile than their larger-cap peers, but can also recover more quickly thanks to their size, which makes them more nimble and, during periods of high market volatility, well-managed, cash-rich smaller companies can become good buying opportunities, Mr MacMahon added.

For example, veteran fund manager Paul Mumford, who runs the £126m Cavendish Opportunities, and the £30.3m Cavendish Aim funds has been using recent volatility caused by oil price falls to buy selected smaller-cap energy companies.

During October, when the oil and gas sector first started to see a decline in shares, the Cavendish Aim fund saw a 4.8 per cent drop against 3.8 per cent in the FTSE Aim Index. However, Mr Mumford used this as an opportunity to add to holdings such as Hurricane energy, which he said was quoted at a “substantial discount to asset value.

“The oil and gas sector has been unduly depressed and at some stage there is likely to be a recovery in oil prices, in which case we could see a strong performance from shares in exploration and production companies.”

His comments were echoed by those of Chris Hutchinson, manager of the Unicorn AIM VCT, who said: “Many businesses on Aim are cash-efficient and cost-efficient and many companies in which we are invested have demonstrated this.

“We like to keep it simple, only investing in profitable businesses selling products and services with a tangible business model.”

Although the Unicorn team did not invest in Asos, he said that, over the past few years, the VCT team has beeen investing in many smaller businesses that have proved to be big players.

Mr Hutchinson said: “One big fish might get away but with careful stock selection you can capture many more. It’s about diversification and making sure that these companies will contribute to performance, not to destroy shareholder value.”